Complex Asset Markets

77 Pages Posted: 5 Jun 2017 Last revised: 25 Aug 2021

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Lei Zhang

The University of Hong Kong - School of Economics and Finance

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Date Written: June 2017

Abstract

We develop a dynamic equilibrium model of complex asset markets with endogenous entry and exit in which the investment technology of investors with more expertise is subject to less asset-specific risk. The joint equilibrium distribution of financial expertise and wealth then determines risk bearing capacity. Higher expert demand lowers equilibrium required returns, reducing overall participation. In equilibrium, investor participation in more complex asset markets with more asset-specific risk is lower, despite higher market- level Sharpe ratios, provided that asset complexity and expertise are complementary. We analyze how asset complexity affects the stationary wealth distribution of complex asset investors. Because of selection, increased asset complexity reduces wealth concentration, even though the wealth distribution for more expert investors has fatter tails.

Suggested Citation

Eisfeldt, Andrea L. and Lustig, Hanno N. and Zhang, Lei, Complex Asset Markets (June 2017). NBER Working Paper No. w23476, Available at SSRN: https://ssrn.com/abstract=2980584

Andrea L. Eisfeldt (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
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HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
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Stanford, CA California 94305-6072
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3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Lei Zhang

The University of Hong Kong - School of Economics and Finance ( email )

K. K. Leung Building, Room 831
The University of Hong Kong
Hong Kong
Hong Kong

HOME PAGE: http://econleizhang.weebly.com/

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